Expats Turn Backs On US Taxes

By ExpatBriefing.com Editorial 20 July, 2010

Increasing numbers of Americans are taking the dramatic step of renouncing their citizenship in order to escape Uncle Sam's all-encompassing tax net.

US citizens are in a uniquely horrible position as expatriates, wherever they reside, since the US is just about the only major nation which taxes its citizens regardless of their residential status, and legislation in recent years has done nothing to improve the situation. And with the Obama administration determined to pass ever-more draconian tax and reporting laws on wealthy individuals and companies stationed offshore in an effort to narrow the federal deficit, estimated at USD1 trillion this year, it seems that many otherwise patriotic Americans are taking the hard-nosed financial choice to escape the clutches of the man from the IRS.

"I run into people like this quite often as part of my travels," observed Daniel J. Mitchell of the Washington-based think tank, the Cato Institute. "They are intensely patriotic to America as a nation, but they have lots of scorn for the federal government."

In the fourth quarter of 2009, 502 US expats renounced their citizenship. This may seem like a drop in the ocean relative to America's total population and the thousands of US expats spread across all quarters of the world, but it was double the number of expats who renounced citizenship in the same period a year earlier. US government figures also indicate that the total number of Americans handing back their passports in 2009 was three-times higher than in 2008, and these headline figures hide the fact that many more hundreds of applications are pending in various US embassies around the world. Indeed, it is said that there is a large backlog of applications pending at the US embassy in London, with some applicants not likely to have their cases dealt with until early next year.

"Even relatively high-tax nations such as the United Kingdom are attractive compared to the class-warfare system that Obama is creating in the United States," observes Mitchell in his blog.

While the Tax Increase Prevention and Reconciliation Act (TIPRA), signed by President Bush in May 2006 increased the amount that can be earned free from US taxes by an expatriate (currently USD91,400) income earned by expats above this threshold is now typically subject to higher tax rates. Furthermore, high housing costs, much of which previously could be excluded from the computation of US tax, are now treated as a taxable benefit, making many individuals worse off, or leaving the employer to pick up the extra bill. A substantial number of US expats were said to have decided to return home as a result.

But more recent legislation has been passed to make it even harder for expatriating Americans. The Heroes Earnings Assistance and Relief Tax Act of 2008 (The 'HEART Act'), which was primarily intended to offer tax breaks to military personnel working abroad, also introduced penal new rules applying to expatriates, as well as addressing some other perceived offshore abuses.

Under the HEART Act, individuals terminating their citizenship are treated as having disposed of all of their property at fair market value on the day before they expatriate or terminate their residence.

However, as Mitchell points out, ultimately, the tax exiles get the last laugh "since the bureaucrats and politicians now get zero percent of their foreign-source income."

Tags: Individuals | Expatriates | Tax | Law | Offshore | Legislation | United States | Exit Tax |


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